The Markets and the Lunatic Fringe

May 31, 2009 - PRLog -- I was doing my usual reading over the weekend and continued to be perplexed by the massive fear resonating through every headline.  Any good data was followed by the proverbial, "but this does not....." as it trails off into a portrait of our approaching imminent demise.

"Next year is not at all clear...."

The most thunderously repetitive thought centered around this comment in an interview with the latest soothsayer in this weekend's Barron's.  I am always intrigued by those who suggest that their presumptions about the present, and often dire warnings, are based on the theme of "we don't know how next year is going to unfold..."

Riddle me this:  

At what point do we "know how next year will unfold"?  

Why is it that we only seem to think we know how next year will unfold when the picture is bright?  

Why do we think there are periods where we know how next year will unfold at all?

We NEVER know how next year will unfold.  We do not know how next quarter will unfold.  I still have not yet met the person who knows how next week will unfold.  In fact, the idea that I am still tying these words to you was unknowable seconds ago.  I could have had a stroke or a heart attack, easily rendering that impossible.  

The Point?

History shows us more than we need to recognize when it comes to reading the future.  The mass perception will not "know what next year unfolds" until it a) gets here and b) feels better and becomes obvious to most already.  

The Problem?

Prices, the items investors must find a way to embrace when their disgust is reaching new heights, will have already rocketed ahead to more than match "that better feeling" at the time it arrives.  

There in lies the enigma that continues to live on in the investment criteria separating those with long-term success from those who feel they are like the dog constantly chasing his tail.  It will not change.

The Reality

The markets are designed to provide this picture.  When we feel the worst, we sell the most.  When we sell the most, prices are pressured to the greatest extent.  As prices are pressured to the greatest extent, rest assured that we will find the "news" meets not only with the current perceived negative state but it will easily surpass and tell us just how bad it will get still.

On the other side of the coin, when we feel the best, we buy the most, stocks included.  When we buy, the pressure is unexplainable to the upside.  The masses follow quickly and the "get rich quick" books line the shelves.  Likewise, the news will tell us everything good, stopping just short of the idea that "actually stocks really do grow to the sky..."

The Bottom Line

Each time, no matter which side of the coin we are on, "it is different".  Not really.  The tune may be a bit different but the theme, in the end, is much the same.  All fear what they cannot see.  It is no different than when you walked into a dark room to go to sleep at age 5.  A little light always helped to keep the goblins away.  

So where are we today?

We are on the dark side of the moon.  The light is low, our vision unclear.  No matter that "the vision is always unclear".  Who needs reality when fear sells so much better.  

The world does not believe for a minute that the rise we have seen for the last 90 days is real at all.  

Capital measurements on the sidelines suggest fear is nearly as deep as it was miles ago.  

Massive levels of liquidity exist that have not budged as they raced into the "safe" feeling of bonds months ago.  

The options masses keep buying more puts and the hedgies, mostly completely screwed by last year's quant breakdowns, find themselves in a twist--and very short.  

The Path Ahead?

More likely than not, now with the masses nearly permanently perched on the edge of hysteria and fear, the movements will surprise to the upside, the data will improve with little explanation, the massive negativity being espoused will be drowned out by the odd market action to the upside and the noise will shift in time.  By that time, prices will have magically risen, with most only comfortable as those same prices they panicked out of reach more expensive levels.  

Sure, there will be corrective waves, some severe.  Yes, there will be windows between now and then where these words will seem to be rather foolish.  In the end, however, the idea that our themes have become massively oriented toward "Mike, it has never been this bad..." is a good thing for investors.  

It means things are cheap....it also means things are scary.  That said, it is little different from when you reached out as that 5 year-old, in the darkness, searching for the door knob on your door and the light that made you feel safe and let you escape the feeling of being alone.  In the end, the door knob was there...and so was the light.  

Aging and life tends to take that faith away from many.  

Besides, the last two times that I heard the same "it's never been this bad..." were in 1982 and 1991.  

The Dow was 970 and 2900 respectively.  

The world was awash in muck.....terrible messes both periods were.  

But, each time, as is the likely case now, our hand was much closer to the door knob and the subsequent light than we understood at the time.  

Embrace the GM Chapter 11.....it is a step in the right direction.

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